Although there aren’t many specifics in the article about what those disincentives would be or exactly how the government would define ‘too big’, this is a much-needed step back on the road to financial sobriety. We should never as an economy or a country be held hostage to the failings of one single entity.

As deeply as I hated all of the bailouts we’ve been throwing around to woefully (borderline criminally, in my opinion) mismanaged institutions like Citigroup and AIG, I do believe their balance sheets may have been so enormous, their footprints and obligations so intertwined in the world economy, that their failure could have crippled the entire foundation of our credit-based system and brought it to its knees.

Yet don’t be fooled – our problems didn’t lie with any one or two entities, but with the entire system. What we had instead was a complete failure by the market as a whole – and even more damning, by the regulators in charge of watching those markets – to recognize the emerging credit/debt/mortgage bubbles whose eventual bursting forced this country to its day of reckoning.

A law breaking up large financial institutions or disincentivizing them from forming in the first place will help make future problems easier to spot and solve, perhaps, but it won’t by itself save us from our own worst behavior.

And it will do very little if anything to impact our current situation and economic crisis.

In fact, the most ironic thing about the Obama plan is that the entity which may now be most accurately considered ‘too big to fail’ is our own U.S. government, which through actions taken by the Fed and the Treasury has taken on much of the bad debt and obligations (and added a bunch of new ones) that will be stifling our economy for years to come.

We can only hope that the Chinese and other foreign governments continue to agree that the U.S. government is indeed too big to fail and allow us the time to work through our issues and restore some amount of fiscal and monetary discipline without cutting off their support in one fell swoop.

Could this be the beginning of the end for our markets’ last great bubble?

An auction yesterday of $34 billion in 5-year U.S. government bonds didn’t go over so well, fetching prices well under what analysts were expecting.

Ruh-roh.

Oh I know, it may not seem like that big of a deal. The debt still got sold, unlike an unsuccessful auction for 40-year bonds in the UK. The fact that our auction resulted in yields (which move in the opposite direction of the price of bonds) of 1.849% versus the expected 1.801% seems like rather unimportant, inside-baseball type of stuff.

And if it’s just one bad auction, then it may not be important (Edit: Demand for an auction of $40 billion in two-year U.S. notes Tuesday was quite strong). But if this weak demand is a signal of things to come, then we are in for a world of hurt.

In the past ten years, we have had a dot-com bubble, a housing bubble, a credit bubble and an oil bubble, but I have contended they will all pale in comparison to the government debt bubble we are now experiencing.

Think about it: The U.S. government, despite owing $10 trillion in debt, despite incurring an additional $1.3 trillion deficit in 2008 (a number which will certainly be crushed this year and likely for years to come if the Obama plan even gets partly realized), has been up until now able to sell almost as much of the debt as it wishes to at extremely low interest rates.

The Pollyannas will say that there’s a good reason for the low cost of our debt, and why that situation won’t change anytime soon. The big concern right now is deflation, not inflation. Other countries have at least as many problems as we do, and too much savings to boot. They need to put their money somewhere, and the U.S. markets are still the world’s best, safest place to invest money. They own too much of our debt to start selling now – it would only lead to mutually assured destruction.

“This time it’s different.” To me, there are no four more dangerous words. It defies the laws of economics and of logic to expect that a nation awash in debt with miles and miles of higher and higher deficits on the horizon will be able to lend more money at virtually zero interest for an extended period of time.

The only question is when do the floodgates open? We’ve heard rumblings of complaints – notably, on the record and not anonymous – from Chinese officials about our country’s economic situation and increasingly high levels of debt. We’ve seen budget deficit estimates from the CBO which far exceed the optimistic ones put together by the Obama team. And now we had a disappointing auction.

Of course, to a certain extent, debasing our currency is what the government wants. If we could control the pace of the move, some inflation would be a good thing since we’re so heavily in debt (as the value of the dollar falls, that means debtors owe less in ‘real’ terms). But it is highly likely that the transition would come too fast and too quick for our economy and our policies to adjust without experiencing significant dislocations and subsequent pain.

I can almost guarantee you that if government debt is a bubble and it does pop, you won’t see our foreign lenders gently exiting the market. It will be a stampede.

And what will be the implications of such a scenario? Believe it or not, they are likely far worse than anything we have seen so far. Interest rates will soar, as will inflation. Savers will be crushed. Investment will grind to a halt. An already weak economy on its knees would get weaker. We will be forced to renegotiate our obligations with foreign lenders, most notably the Chinese.

It’s unsurprising because China has always been overly concerned with its image, worried about its standing in the world and whether it was getting appropriate respect among more established powers. It’s like the little brother finally starting to come into his own and wanting to make sure the entire family knows it. And because the government is so used to controlling how its people get their news (this is a country that denied the extent of the SARS virus problem for months, after all), it’s no wonder that they tried to extend that control to the opening ceremony.

Yet the manipulation was also appropriate because it provided a perfect metaphor for modern China, a nation that is undoubtedly a growing global power, accomplishing many amazing feats, but one that still feels compelled to shape perceived reality, to try and project an even more impressive image. It glosses over the fact most of its billion-plus citizens are still living in abject poverty. It hides the fact it treats animals in horrible ways. It ignores the fact its people are denied basic human rights.

For China, reality has always been what it makes it, as something under its control.

Dog eating is considered barabaric? Then we’ll take it off the menu for a couple of weeks. Our air is considered unhealthy? Then we’ll take the cars off the road for a while. Our weather is considered too dreary? Then we’ll shoot the clouds with iodine-filled rockets and make it rain outside the city.

So forgive me for not being surprised or offended by the fact that China decided to enhance an already impressive fireworks display with computers, or to replace a cute little Chinese girl with an even cuter one. I’m actually glad … because most of the world is being introduced to China for the first time, and now they’ll be sure to know the truth: China has come a long way, but it still has a long way to go.

I was going to write tonight about John Edwards and his affair but that sleazebag can wait because I just got done watching the opening ceremony of the Beijing Summer Olympics. And all I can say is …

WOW!

I mean, seriously, i feel so bad for the Londoners planning the 2012 Summer Games. They’ve got to be shitting in their pants wondering how they follow that act. Hell, I can’t imagine any country ever putting together a better show. The Beijing ceremony was majestic, stunning, artistic, intimidating, dazzling, and at times, emotional and moving. It’s the type of event the word awesome was created for.

But it certainly wasn’t surprising. I’ve been to China twice in the last five years, and nowadays they do most everything B-I-G (I never saw so many cranes in my life, and I left the country committed to making sure my future children learn Mandarin).

China is clearly a country obsessed with progress – and damn the associated costs and trade-offs (environmental, social, historical, etc.). The Chinese people and government often seem insecure about their country’s standing in the world, so I had a feeling no expense would be spared as they prepared to strut their stuff during the Olympics.

Of course, the Beijing games are also causing a fair amount of controversy due to the country’s horrid human rights record, which basically continues to this day. Civil liberties are a joke. The justice system is a farce. And any significant dissidence is just not tolerated.

Some people are boycotting these games to protest the Chinese government’s policies and practices. That’s their right, of course, and I do think it’s important at a time like this to shine a spotlight on the negative part of China as well. But i also think these Olympic games are going to do a lot more good than harm. Nothing will bring about change faster in China than by welcoming the country and its people onto the global stage.

It’s the same reason why I disagree with people who want U.S. online companies like Google and Yahoo to avoid doing business in China rather than cooperate with its government. The Internet is tough to totally censor, and I just feel that true, lasting change is much more likely to occur once the Chinese people get a taste of the freedoms we enjoy, even if its a small, limited taste. Stay out of China, isolate the country and its people, and I guarantee no one will hear you; Why not at least open up the possibility of incrementally altering attitudes from within?

I personally think the Chinese government has already sown the seeds of its destruction by introducing market-based aspects to the economy. In the long run, political communism and economic capitalism aren’t compatible, and history shows very clearly which side is likely to win out. It may not happen as quick as we would like, but it will happen.

I’ve always felt that change is usually an inexorable part of history, but that it only comes when the time is right. It can’t be forced. That doesn’t mean that you should stand idly by and wait for change. People’s actions can absolutely accelerate the pace of progress, and you never know which spark is going to be the one that lights the fire.

The students at Tienanmen Square didn’t waste their effort or their lives; they just set the stage for the next act to follow, one that will hopefully be much more meaningful than the visually impressive but ultimately shallow spectacle put on last night in Beijing.